U.S. ex rel. E & H Steel v. C. Pyramid Enterprises, 06-4209.

• Decision Date: 27 November 2007
• Docket Number: No. 06-4209.,06-4209.
• Parties: UNITED STATES of America for the use and Benefit of E & H STEEL CORPORATION v. C. PYRAMID ENTERPRISES, INC.; Fidelity & Deposit Company of Maryland; and Zurich American Insurance Company, E & H Steel Corporation, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

509 F.3d 184

UNITED STATES of America for the use and Benefit of E & H STEEL CORPORATION v. C. PYRAMID ENTERPRISES, INC.; Fidelity & Deposit Company of Maryland; and Zurich American Insurance Company, E & H Steel Corporation, Appellant.

No. 06-4209.

United States Court of Appeals, Third Circuit.

Argued September 18, 2007.

Filed November 27, 2007.

David W. Mockbee, Esquire, (Argued), Mary Elizabeth Hall, Esquire, Mockbee Hall & Drake, P.A., Jackson, MS, Sandhya M. Feltes, Esquire, Kaplin, Stewart, Meloff, Reiter & Stein, Blue Bell, PA, Attorneys for Appellant.

Paul W. Norris, Esquire, (Argued) Lewis J. Pepperman, Esquire, Stark & Stark, A Professional Corporation, Princeton, NJ, Attorneys for Appellees.

Before: SLOVITER, SMITH and WEIS, Circuit Judges.

OPINION

WEIS, Circuit Judge.

In this Miller Act case, we decide that a firm acted as a subcontractor when it supplied fabricated steel to the prime contractor that then used the material to construct the framework for a large Air Force facility. The subcontractor defaulted in payments due the company that it hired to fabricate the steel and deliver it to the construction site. The District Court denied recovery to the steel fabricator in this suit against the prime contractor and its sureties. We will reverse and remand for entry of judgment in favor of the steel company.

In September 2002, C. Pyramid Enterprises, Inc. was awarded a contract by the United States Army Corps of Engineers to design and build a large C-17 Maintenance Hangar and Shops facility at the McGuire Air Force Base in New Jersey. The original contract price was $24,119,450.00.

Pyramid issued a standard form "purchase order" to Havens Design-Build to provide custom fabricated structural steel for the building's framework at a cost of $2,230,000.00. The agreement provided that Havens was also to arrange for the preparation of shop drawings and erection drawings, design the connectors for the steel, and perform some "design assist engineering" that primarily involved material substitution.

Havens in turn contracted with E & H Steel Company to fabricate the steel and deliver it to the construction site. E & H delivered 50 trailers of fabricated steel between November 13, 2003 and April 16, 2004.¹ Pyramid erected the steel framework for the building and did most of the remaining construction itself, including the electrical, mechanical, site utilities, plumbing, and concrete work.

In accordance with the Miller Act, 40 U.S.C. § 3131(b)(2), Pyramid issued a payment bond in favor of "all persons having a direct relationship with [Pyramid] or a subcontractor of [Pyramid] for furnishing labor, material or both in the prosecution of the work provided for in the contract." Defendants Fidelity & Deposit Company of Maryland and Zurich American Insurance Company acted as sureties on the bond.

Although it had been paid by Pyramid during the construction process, Havens filed for bankruptcy owing E & H $565,125.40 for the delivered steel. E & H brought suit against Pyramid and its sureties, asserting entitlement to reimbursement from the payment bond. After a bench trial, the District Court found in favor of defendants.

The Court correctly determined that because of a statutory limitation E & H's right to recover on the bond hinged on whether Havens was a "subcontractor" under § 3133(b)(2) of the Miller Act. However, case law did not provide a uniform rule for determining whether a company such as Havens, which acted as a middleman between a general contractor and a supplier of materials or services, was a "subcontractor." In resolving that issue, the Court considered a number of factors, including the nature of the material or service supplied, the cost of the material or service in relation to the total contract price, the payment terms and exchange of information, and the overall relationship between the contractor and the middleman.

The District Court concluded that Havens furnished standard work customarily performed by steel fabricators, a role similar to that of a supplier of pre-cut wooden beams for residential construction. Havens supplied material from non-inventory stock and Pyramid used the steel to erect the building's substantial frame. Although Havens' work on the project comprised 7.8% of the total contract price, the District Court noted that Havens did not post a bond or provide insurance or payroll data to Pyramid. Finally, the District Court observed that Pyramid and Havens did not have a prior relationship.

After evaluating these details, the District Court held that Havens was a material supplier and not a "subcontractor" under the Miller Act. Therefore, E & H was not entitled to recover on the bond.

E & H timely appealed. We have jurisdiction under 28 U.S.C. § 1291 and under the Miller Act, 40 U.S.C. § 3133(b)(3)(B).

I.

Congress recognized that sovereign immunity left suppliers of labor or materials for federal construction projects without the protection of the mechanics' liens normally available in private industry. See Dep't of Army v. Blue Fox, Inc., 525 U.S. 255, 264-65, 119 S.Ct. 687, 142 L.Ed.2d 718 (1999). To provide some protection for suppliers, Congress enacted the Heard Act² and later replaced it with the Miller Act, found in its current version at 40 U.S.C. § 3131, et seq. Id.³

The Miller Act requires every contractor on a federal government contract exceeding $100,000 to provide "[a] payment bond with a surety . . . for the protection of all persons supplying labor and material in carrying out the work provided for in the contract." 40 U.S.C. § 3131(b)(2). In pertinent part, § 3133(b)(1) provides that "[e]very person that has furnished labor or material . . . and that has not been paid in full within 90 days after the day on which the person did or performed the last of the labor or furnished or supplied the material . . . may bring a civil action on the payment bond." 40 U.S.C. § 3133(b)(1).

However, § 3133(b)(2) limits the scope of those protected. It states:

"A person having a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond may bring a civil action on the payment bond on giving written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made."

40 U.S.C. § 3133(b)(2).

Because the statute does not define the term "subcontractor," the Supreme Court has been called upon to explain the meaning of the term. In Clifford F. MacEvoy Co. v. United States ex rel. Calvin Tomkins Co., 322 U.S. 102, 64 S.Ct. 890, 88 L.Ed. 1163 (1944), the Court recognized that the Miller Act "is highly remedial in nature. It is entitled to a liberal construction and application in order properly to effectuate the Congressional intent to protect those whose labor and materials go into public projects." Id. at 107, 64 S.Ct. 890.

Nevertheless, the Court observed that it must also give effect to Congress' intent to limit liability under the Act through the restrictions in § 3133(b)(2). Id. at 107-08, 64 S.Ct. 890. In the Court's view, Congress used the term "subcontractor" in the technical sense to apply to "one who performs for and takes from the prime contractor a specific part of the labor or materials requirements of the original contract, thus excluding ordinary laborers and materialmen." Id. at 109, 64 S.Ct. 890.⁴

The Court pointed out that its conclusion was supported by practical considerations in that it was unlikely that Congress intended to impose liability on the general contractor for labor and materials provided by those beyond the "relatively few subcontractors who perform part of the original contract" and are well known to the prime contractor. Id. at 110, 64 S.Ct. 890. In a later case, the Court also made clear that Congress "intended the scope of protection of a payment bond to extend no further than to sub-subcontractors." J.W. Bateson Co. v. United States ex rel. Bd. of Trustees, 434 U.S. 586, 591, 98 S.Ct. 873, 55 L.Ed.2d 50 (1978).

The Supreme Court further explained its definition of a "subcontractor" under the Miller Act in F.D. Rich Co. v. United States ex rel. Indus. Lumber Co., 417 U.S. 116, 94 S.Ct. 2157, 40 L.Ed.2d 703 (1974). F.D. Rich, the prime contractor for a federal housing project, awarded two contracts to Cerpac Company, one for the installation of custom mill work and another to provide standard sheets of plywood. Id. at 119, 94 S.Ct. 2157. Cerpac had a close relationship with F.D. Rich and had worked with it on other projects. Id. at 118, 94 S.Ct. 2157. Cerpac placed an order for the plywood with Industrial Lumber, a broker, which purchased the plywood from its own suppliers. Id. at 119, 94 S.Ct. 2157. After Cerpac fell behind in its payments for the wood, Industrial Lumber filed a claim under the Miller Act. Id. at 120, 94 S.Ct. 2157.

The Court concluded that under MacEvoy the test for determining whether one is a subcontractor hinges on "the substantiality and importance of his relationship with the prime contractor." Id. at 123, 94 S.Ct. 2157. The Court noted that Cerpac, in addition to its role as a plywood supplier, had a contract "to select, modify, detail and install all custom millwork . . . [and] in effect, took over a substantial part of the prime contract itself." Id. at 124, 94 S.Ct. 2157. Finding that the close relationship and prior dealings between Cerpac and F.D. Rich was determinative, the Court concluded that Cerpac acted as a "subcontractor" when it supplied the plywood and Industrial was entitled to recover. Id.

The F.D. Rich Court explained that the ability of a prime contractor to protect itself by requiring a middleman to post a bond is an indication that he is a "subcontractor." Id. Generally, when a subcontractor is required to provide a bond the premiums will cause him to...